What is an interest-only mortgage?

If you’re struggling to find mortgages with manageable monthly payments, hope isn’t necessarily lost. An interest only mortgage might be the way to go.

But while your repayments will be lower each month, there are some serious things to consider before you sign up. Here’s all you need to know about this type of loan.

Piqued your interest?

An interest only mortgage is essentially what it sounds like: it doesn’t charge you anything but interest on the loan until the end of the mortgage term.

You won’t be paying down the loan itself each month, which means that the repayments are substantially lower.

If we take a 25-year loan of £220,000 with a 4% fixed interest rate as an example, you’d be coughing up £733 a month. This looks quite appealing when you could be paying almost £1,500 for the first few months when capital debt repayments are added to the interest amount.

When the deal ends, you’ll be asked to pay the amount back in full. The £220,000 loan in this example would still be outstanding.

Pros and cons

Advantages:

  • Beneficial for buyers who are expecting a windfall in the future

  • Buyers can invest the savings from lower monthly repayments

Disadvantages:

  • Unlike repayment mortgages, where the interest decreases as you pay down the capital, your interest payments will remain the same

  • If you can’t pay the mortgage off in one lump sum when you agreed to, your home could be repossessed, and there will be nothing to show for your interest payments

  • If the market changes, and if your house falls in value, you’ll still pay interest on the original loan. The flipside of that is also true: when homes rise in value, you won’t pay extra, because the loan amount is unchanged.

  • Getting one can be very tough. Lenders can see interest only mortgages as a riskier prospect.

If you’re unsure whether or not an interest only mortgage could be right for you, our advisors can help. To find out more, click here.

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